How Can States Fix Their Medicaid Programs?

All states will inevitably have to find ways to reform how they pay for Medicaid services. Right now, that way is looking like accountable care organizations.

A hospital in Oregon, which is among a handful of states leading its Medicaid system into a new era. Wikimedia Commons

Erin Fair Taylor’s job isn’t easy. That’s because every day, she must figure out how to pay doctors. Taylor works for CareOregon, which is playing an active part in Oregon’s effort to overhaul its Medicaid system. As such, it’s her job these days to find a way to spur physicians toward lowering costs for care while maintaining a high quality of care. As she’s been talking with doctors, Taylor says, “many of them see the benefit” of what the state is trying to do. But also, she adds, there’s fear.

Oregon is among a handful of states leading its Medicaid system into a new era. Traditionally, states have provided Medicaid benefits using a fee-for-service system -- an approach critics say encourages providers to administer more services, often unnecessary ones. As a result, states over the past two decades have been implementing managed care organizations (MCOs), in which people receive most or all of their Medicaid services from an organization under contract with the state. Under these systems, a state pays a flat, capitated rate per beneficiary to the managed care organization. The concept makes state costs more predictable. But in many cases managed care is still driven by fee-for-service payments. The simple difference is that it merely shifts the bills from the state to the health plan.

So now, states are looking for yet another way to compensate health-care costs. In so doing, Oregon and a few other states are following the push toward accountable care organizations (ACOs). The idea is to actively involve doctors in lowering costs and maintaining quality service. That is, health-care providers will take on some of the financial risk and thereby control care costs.

At a basic level, an ACO gives doctors, hospitals and clinics the responsibility to provide care for a group of patients within a specified budget. If health-care providers better coordinate care to provide good quality for less money, they can share in the savings. ACOs started out as mostly a private-sector phenomenon. As recently as 2010, there were only 41 such practices in existence. Today, that number has exploded to at least 600. ACOs have already started to take root in Medicare; now they’re making their way into Medicaid.

All states will inevitably have to find ways to reform how they pay for Medicaid services. For many, it will be within their existing system of managed care. Those systems are expected to grow, encompassing 75 percent of all Medicaid enrollees by 2015 as states expand the program under the Affordable Care Act or place new categories of patients in managed care. Given that, it is not surprising that some states are beginning to look for a better way to pay for care. Right now, that way is looking like accountable care organizations.

Minnesota is one of the leaders behind the accountable care movement. It launched an initiative in 2013 to test ACOs in Medicaid. For the first year, the set-up was pretty straightforward: The state let provider groups set risk terms they were comfortable with. Any savings realized were shared with those ACOs that came in under budget -- that is, those that provided care for less than the targeted amount. This year, some larger health systems may have to pay the state back if they go over budget.

Managing that risk is much easier for larger providers, with several revenue streams and control over every segment of care. That’s why the state isn’t requiring smaller practices to take on “downside risk” -- where systems can actually lose money if they exceed an agreed-upon level of spending. The larger systems that are taking on downside risk in the second year are building toward a 15 percent goal -- meaning they split savings or overages with the state up to 15 percent above or below their spending goal. “[In the first year,] they wanted to ease us into it so they could increase the trust level that would allow us to take risk in the following year,” says Greg Klugherz, the chief financial officer at St. Cloud Hospital, a facility 60 miles northwest of Minneapolis. Klugherz acknowledges that the financial exposure of downside risk would be a fairly small part of St. Cloud’s revenue, but he sees the risk-sharing change as strengthening the system’s focus on long-time priorities, such as reducing hospital-acquired infections.

Risk-sharing between doctors and payers is a key element of accountable care organizations. It is one reason Medicaid managed care companies haven’t been as keen on the ACO model. The doctors they work with often can’t see the upside, given the program’s low reimbursement rates and the inherent challenges of caring for a low-income population. A few Minnesota MCOs are open to the idea of shared-risk arrangements, but they are unable to align their arrangements with the state because the state contracts are confidential, says Geoff Bartsh, the vice president of state public programs at Medica, Minnesota’s second-largest insurance company. In the short term, Bartsh views Medica’s Medicaid role as providing ACOs with data on medical utilization and helping them keep track of their populations so they can push their deals with the state in the direction they want. “For some of them that will be, ‘We want to take risk and we want your help managing the population,’” he says. “Others won’t be ready to go there, and it will be baby steps aligning quality with incentives.”

As for how Minnesota’s overall experiment with ACOs and downside risk is going, it’s too soon to tell. But the six integrated health systems that took part in 2013 spent $10.5 million less than projected. Five of them are phasing in downside risk this year.

To be sure, there’s plenty of skepticism about ACOs and their ability to tame costs. Some of it stems from the lack of success in past efforts to align physician groups and hospital systems. Reputable studies have found mixed results and decreasing returns among efforts to pay doctors for performance.

To Medicaid Health Plans of America, a trade association, the biggest question is how managed care organizations or the state will share risk for costs and quality. In order for ACOs to lower costs in the long term, they’ll have to take on the kind of risk that managed care plans assume with their capitated payments, says Jeff Myers, the group’s president. “The ACO provider-centric model is something we can work in coordination with, but it ultimately won’t displace the MCO model.” That’s because MCOs are still better at letting states predict future costs, he says. Moreover, paying MCOs a flat rate actually helps encourage them to innovate. “Fully capitated risk drives innovation, because [the plans] are on the hook for all the money. It would be interesting whether you could see a full risk-based ACO model work.”

Oregon is probably the closest to finding out. The state is unique in that most of its 15 original ACOs grew out of what were previously the state’s MCOs. In many cases, these plans took leading roles in building new networks with the doctors that serve a region. Some plans have ownership stakes in the new ACOs and perform many of the administrative functions they did before. But they are also driving integration of different medical services and building case management structures through primary care teams that are incentivized to sign up Medicaid patients.

Oregon withholds 2 percent of payments to distribute at the end of the year based on whether the ACO meets a predetermined set of quality measures. In terms of moving away from fee-for-service at the provider level, however, the state is really just beginning. MCOs like CareOregon are talking with hospitals about bundled payments and forms of capitation for primary care doctors. What that would actually like look is harder to say. For instance, how much financial accountability can a primary care doctor shoulder for, say, a patient who is later admitted to a hospital for a costly procedure? Issues like that could require the plan to assume some of those costs, says Taylor, the plan’s director of coordinated care partnership and development.

Considering that health systems often operate on fixed budgets, there’s already risk built into Oregon’s model, along with common quality metrics, notes Evan Saulino, president of the Oregon Academy of Family Physicians. What Oregon’s ACOs really need now -- and what they are starting to do -- is to invest an additional per-member allotment to primary care doctors, who are taking an active role in managing their patients’ health.

Primary care is seen as the backbone of ACOs: Getting a patient’s primary care right can help avoid additional costs down the road. In 2013, spending on primary and preventive services in Oregon was up 20 percent but emergency room use was down 17 percent. “The idea was to support the places that led to the savings in the first place, so if they’re getting lots of people into primary care homes or getting people mental health access, then some of the money should go to continue that work,” Saulino says. “That’s not necessarily roundly reimbursed work under the old system of payment.”

The idea of giving doctors a small, additional per-member fee actually originated with Colorado, which started offering $20 per member each month to its ACOs, with $4 of that going directly to primary care practices. The state has since been withholding a small portion of that for performance targets such as reducing high-cost imaging or ensuring timely enrollment of patients. Colorado’s upside arrangement carries little in the way of real risk. Providers are still paid on a fee-for-service basis with the extra money coming from the federal government. But so far it has served the state well, helping net $6 million in savings last year.

It’s a system that better fits Colorado’s skepticism toward tightly capitated care, which stems from a major fallout with MCOs in the mid-2000s. “[The ACOs] are helping manage services while improving quality and controlling costs,” says Laurel Karabatsos, the state’s deputy Medicaid director. “Hopefully because we’re paying them for quality they won’t have that incentive to ration care.”

The bottom line, these states say, is that the best way to drive down the costs of health care is to refocus what it is they’re paying for -- reimbursing for outcomes rather than services provided. And making physicians an active, accountable part of that equation could be the key to making those efforts succesful.